4 Closed End Funds Trading at Deep Discounts

Includes: ADX, AWP, GAM, SWZ
by: Robert Lewis
During the past 10 years the closed end fund industry (as well as the mutual fund and hedge fund industries) has prospered and grown. Historic discounts from net asset values narrowed and numerous, highly specialized funds were launched. Needless to say not all investment strategies worked. Many of the strategies employed by these CEFs offered exceptionally high returns in exchange for taking high risk. The wealth destruction suffered by many of these funds routinely exceeded the general market decline on a percent basis (which itself, was not insubstantial). Not only were investments made in high risk securities but the funds availed themselves of leverage within their capital structure while investing in securities which contained their own internal leverage. This strategy did not produce satisfactory results for many of these funds.
In addition to suffering major price declines, the discounts to net asset value also widened with many funds selling at 15 – 30% below NAV. Many of these funds holding securities or investments with no current market value have also marked down the values of these unmarketable securities to realistic levels or even to levels where they cannot be accused of inflating values, so that they can avoid ‘criticism’ (i.e. shareholder lawsuits). Although these strategies may not have been successful, it does not mean that the underlying funds do not have value.
We currently own these four funds for the following reasons:
  1. Deep discounts to net asset value;
  2. Recognized investment manager;
  3. Most unmarketable underlying securities have been written down to actual value or even below actual value; and
  4. A nice contrarian play: These funds are not being recommended by the investment community and are for the most part being totally shunned and abandoned.
Please note that there is very good reason for the above. They have been miserable investments and people have lost good money. At present there are no signs of recovery on the horizon. As bad as things are now, they can theoretically get worse.
We believe that now is the time to make such an investment in these four funds as we already have. They will certainly offer much volatility, which any purchaser must be prepared to accept. There will be losses no doubt but our projection is that a few successes will significantly overcome any losses that are incurred.


This fund is one of the oldest closed end funds and is traded on the New York Stock Exchange under the symbol ADX. As of December 31, 2010 the fund had total assets in excess of 1.1 billion dollars. The fund is internally managed with little turnover resulting in an expense ration of .58% for 2010. The fund sells at a fluctuating discount to net assets of approximately 15%. In 2010 it had a payout ratio of 5.1% while showing a total return of 11.5%.
The fund invests primarily in large cap growth stocks, which include as a percent of total assets, the following:
  • Oracle 3.1%
  • Microsoft 2.9%
  • Apple 2.4%
  • JP Morgan Chase 2.1%
  • PepsiCo 2.1%
  • Procter & Gamble 1.8%
  • General Electric 1.7%
  • Target 1.7%
  • McDonald’s 1.7%
5.3% of assets are invested in a non-controlled affiliated closed end fund called Petroleum and Resources (NYSE:PEO) which is also traded on the NYSE. PEO is similar to ADX in that it is also long established with low annual expenses but invests primarily in a diversified portfolio of energy and natural resource companies and sells at a modest discount to net asset value.
Adams Express has extremely low turnover with the average investment remaining in its portfolio for many years. It represents a diversified portfolio of large cap blue chip stocks which can be purchased at a substantial discount to net asset value. Many of its shares have been held by investors for three if not four generations.


This fund invests solely in Swiss securities and is managed by Hottinger Bank which is a private Swiss bank established in the 18th century and devoted to the management of private wealth. It is traded on the NYSE under the symbol SWZ. It sells at approximately a 13% discount to net asset value. It is wrong to regard this as solely a country specific fund as the companies it invests in are truly international in nature although domiciled in Switzerland. Among its larges holdings are the following:
  • Nestle 18.71%
  • Novartis 13.93%
  • Roche 8.05%
  • Credit Suisse 4.22%
Novartis (NYSE:NVS) and Roche (OTCQX:RHHBY) are two of the largest pharmacuetical companies in the world, while Nestle (OTCPK:NSRGY) is a household name and Credit Suisse (NYSE:CS) is a massive financial institution. The fund experiences little turnover and is a true international investment. The investment manager, Hottinger Bank, normally only accepts funds for management from extremely wealthy international investors.


This fund invests in real estate throughout the world by purchasing shares of international real estate companies. As of October 31, 2010 it had assets in excess of 800 million dollars and is traded on the NYSE under the symbol AWP. The portfolio manager, Alpine Woods, specializes in REITS and real estate companies and is pre-eminent in its field. The fund trades at approximately a 17% discount from net asset value. This is a fully diversified real estate fund with investments in retail, office, residential and lodging properties throughout the world. The following is a breakdown of its top holdings:
United States 30.6%
  • Brazil 18.4%
  • Singapore 9.3%
  • United Kingdom 5.9%
  • Japan 5.1%
  • Retail 17.2%
  • Residential 16.6%
  • Diversified 15.5%
The expense ratio is 1.32% of net assets and investment income as of the year ending October 31, 2010 was 4.97%.


This is a leveraged equity fund which has been around since 1927. It trades on the NYSE under the symbol GAM and currently sports a 14% discount to net asset value. As of December 31, 2010 the fund had gross assets in excess of $1.1 billion dollars of which approximately 20% was through preferred stock with a fixed dividend of 5.95%. This fund uses a rifle rather than a shot gun and its top ten holdings are approximately 40% of its assets. The fund is a long-term investor in large cap growth stocks. GAM is internally managed by an investment advisor headed by Spencer Davidson who has been with the fund for many years and has a substantial personal investment in the firm. Its top five holding are:
  • The TJX Companies 7.6%
  • Weatherford International 5.2%
  • Costco Wholesale 4.4%
  • Apache Corporation 3.7%
  • Qualcomm 3.6%
GAM has been around for a very long time and has produced quality results. Its expense ratio is 1.54% and only produces .66% income to net assets because of its emphasis on high growth and its fixed preferred obligations. It is an excellent investment vehicle for the large cap high growth rate philosophy it serves.
The above funds are just a few of the funds that appeal to us. Our full portfolio generally consists of between 20 – 25 funds.
Disclosure: I am long ADX, AWP, GAM, SWZ.
All data in this article is taken directly from the following sources:

1. The Closed End Fund Association (CEFA) website;

2. The individual fund management companies websites;

3. The Smith Barney website;

4. The Banc of America Securities website;

5. Standard & Poor’s; and

6. Argus research.

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